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CARES Act and the PPP

Benjamin E. Cain
May 7, 2020

          On May 6, 2020, the U.S. Small Business Administration (“SBA”) announced an extension of the deadline to return any loan received under the Paycheck Protection Program (“PPP”). Previous SBA guidance and regulations had provided that applicants who applied for PPP loans prior to April 24, 2020 had until May 7, 2020 to return the loan in full in order to be deemed to have made the required economic necessity certification in good faith. The SBA has now extended this safe harbor to May 14, 2020. Specifically, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), under which the PPP was enacted, provides that all applicants for a loan under the PPP must certify in good faith “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.” CARES Act §1102 (a)(G)(i)(I).

          The latest SBA guidance elaborating on this certification requirement states that “all borrowers should review carefully” the required elements of the certification and that before submitting an application, borrowers must take “into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” See SBA PPP FAQ # 31. There are a number of factors indicating that this guidance is tailored towards larger, publicly traded small businesses. For instance the guidance, issued in the form of an FAQ, is framed as follows: “Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?”

          The example given in the answer to the FAQ states “for example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.” Further, in PPP FAQ #39, the SBA stated that “to further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million.” We nevertheless advise our clients who have applied for PPP loans that even if they do not consider themselves to be “large companies” or do not expect to receive PPP loans even close to $2 million, that they assess their ability to access “other sources of liquidity” and whether accessing such sources in lieu of receiving a PPP loan would be “significantly detrimental” to their business.

          We assist our clients in evaluating their rationale for the required certification. Unfortunately, there are no clear standards, as the guidance provided by the SBA as to how a small business must evaluate economic necessity, like most of the ever-changing guidance regarding the PPP, is lacking in clarity and specificity. The SBA appears to recognize as much and has announced that it intends to provide additional guidance on how it will review the economic necessity certification prior to May 14, 2020. Once the SBA releases such guidance, we will promptly provide updates to our clients on how this guidance might affect their respective PPP loans.